Bioindustry: A Description of California's Bioindustry and Summary of the Public Issues Affecting Its Development
By Gus A. Koehler, PhD.

Biotechnology is still a new field with many broad applications. The federal
government does not yet classify it as a specific industry with its own
standard industrial classification (SIC) codes. As a result, there are no
official sales estimates for bioindustry products and services, nor are there
employment estimates. All bioindustry data must, therefore, be viewed with
some caution.

Unofficial U.S. Department of Commerce sales estimates indicate that shipments
of bioindustry products (including human therapeutics and diagnostics,
agricultural products, specialty products, and non-medical diagnostics) have
grown rapidly, from $350 million in 1986 to $4 billion in 1992. (See Chart 1.)
The Department expects sales to increase 15 to 20 percent per year over the
next five years. The accounting firm of Ernst and Young has estimated that
industry-wide sales increased by 20 percent (from $4.3 billion to $5.2 billion)
from fiscal years 1992-93 to 1993-94, [63]and by an additional
21 percent for fiscal years 1995-1996 (from $5.6 billion to $6.8 billion).
64 The Federal Coordinating
Council for Science, Engineering and Technology estimates that by the year 2000
bioindustry will have sales of $50 billion in the United States. 65 By any estimate, the potential of the
industry is enormous.

Sales of biotechnology products are distributed among several categories, as
summarized in Chart 2 for 1992 by Ernst and Young.

Medical products (therapeutics and diagnostics) are the largest market segment
in the industry, representing from 70 percent to 90 percent of sales. Although
agricultural bioindustry products have a great deal of potential and have
received much press attention, medical drugs and testing have thus far been the
most important commercial markets.

California's bioindustry sector generally follows the national pattern, with
therapeutic and diagnostic products having the largest number of companies,
sales, and developing and approved products. There were an estimated 1,272 to
1,311 public biotechnology companies and subsidiaries in the U.S. in 1995.
66 This number decreased
slightly in 1996. However, the number of people employed in the industry grew
by an estimated 13 percent the same year. 67 Nationally, while segments of the
industry are increasing employment others have begun downsizing or refocusing
their operations in an effort to deal with capital problems. Twenty-nine
percent to 32 percent 68 of all
U.S. firms are located in California. This estimate does not include the many
technical and service businesses that support biotechnology research and
manufacturing efforts. When these supplier companies are included, there may be
as many as 800 bioindustry-related firms in California. Bioindustry companies
tend to be new, small, and near leading research institutions.

Businessweek magazine has identified 58 biotechnology firms that are
developing "blockbuster" drugs of the future; nearly half are California
firms.

There may be as many as 1,000 biotechnology-related firms in the Bay Area
alone, using a broad definition of the term (including medical devices and
pharmaceutical companies). 69
The San Francisco Bay Area, San Diego, and Los Angeles/Orange County regions
have impressive bioindustry clusters (see Table 2, below).

California biotechnology firms generally concentrate their activities around
human diagnostics, pharmaceuticals, and therapeutic applications. Despite the
importance of agriculture to California's economy, the state's biotechnology
industry does not appear to emphasize agricultural applications of
biotechnology. 70

California's bioindustry product is research oriented and is beginning
to move into manufacturing. Only three companies have FDA approved drugs and
all three are manufacturing in California. The state's pharmaceutical industry
has historically not manufactured drugs and related products. The American
pharmaceutical industry is primarily located on the East Coast. 71 As a consequence, many small California
companies are developing partnerships with or are being purchased by large
pharmaceutical manufacturers located in other states or nations in order to
move their products to market. This is unfortunate, particularly given the
state's investment in the University of California, whose faculty research has
produced many of the scientific breakthroughs and new start-ups. A
manufacturing jobs pay-off would be beneficial to the state's economy.
72

It is difficult to determine the number of Californians employed in
bioindustry because data categories overlap with many other high technology
industries. The California Health Care Institute estimated that approximatly
131,000 Californian's are employed in the industry with an average wage of
$58,233 in 1996. 73 Estimated
1991 bioindustry employment data in Table 3 below show that California has
captured a significant portion of jobs in several sectors. (For comparison,
California has about 12.5 percent of the national economy and 13 percent of
population.)

A 1988 study of the San Francisco Bay Area's bioindustry provides an
additional perspective. Companies were divided into two groups: biotechnology
research and production; and materials technology. Materials technology
(chemicals and special products such as growth factors, proteins, etc.)
supports the service needs of biotechnology research and production firms. The
two sectors depend on each other to carry out their activities. Table 4
provides an estimate of the number of people employed in each sector, as of
1988, with projections through the year 2000.

The Bay Area data (Table 4) indicate that the fastest growth may be in the
materials technology component of bioindustry. Barriers to market entry are
fewer and start-up and lead-time costs are lower. New products are thus able to
move into the manufacturing

phase more quickly. 74
Additional job growth is predicted in the diagnostics and therapeutics sectors.
San Francisco Bay area researchers found "the employment growth rate in other
industry sectors (including bio-agriculture, medical devices, and
instrumentation) is expected to average 6% to 8% annually through the decade."
75

The Los Angeles region (Los Angeles, Orange, Riverside, San Bernardino and
Ventura Counties) ranks sixth nationally in the number of companies. There are
an estimated 28 to 68 biotechnology firms in the region, depending on
definition of the term. 76
Biotechnology employment is expected to grow at least as fast in this region as
it is in the San Francisco Bay Area.

San Diego's bioindustry employment grew by nearly 14.7 percent in 1993,
particularly in agricultural technology, orthopedic/prosthetic devices,
pharmaceuticals, and scientific devices. The lowest rate of employment growth
occurred in optical and ophthalmic products, biomedical instruments, chemicals,
and medical devices. 77 An
estimated 20,000 San Diegans are employed in bioindustries; as many as 45,000
people could be employed by the year 2000. 78

Over 32 percent of the 1,300 biotechnology firms in the United States are
located in California. These 400 companies plus nonprofit research institutions
employ approximately 50,000 to 65,000 workers. Recent estimates project a
national biotechnology workforce of over 105,000 by the year 2000, and the
biotech workforce in California could increase by at least 12,000 to 20,000 new
jobs by the end of the 1990s. 79

Although the industry is relatively small when compared to
manufacturing or services, there is a great deal of "spin-off" employment
associated with it. For example, each job in the pharmaceutical industry
results in an estimated 5.5 additional jobs in the economy from purchasing
inputs and consumer spending. This multiplier of 5.5 is much higher than for
most other industries, which typically have multipliers ranging from two to
three. In the case of biotechnology, investment in plant equipment and other
physical resources is very high per employee. There is also a large value added
per worker, since pharmaceutical firms produce relatively high-value goods and
services. Employment increased in the California pharmaceuticals industry
during the late 1980s and early 1990s: "Manufacturing employment for
pharmaceuticals and medical devices is up 45 percent since 1984 to 70,000
in California] ." 80

California's estimated 800 bioindustry firms generated $2.6 billion in product
sales and $5.5 billion in total annual revenues (licensing, and contract
research for example) in 1993. 81
Chart 3 shows revenue shares of the three major biotechnology regions in
California. The San Francisco Bay Area is the leading U.S. region, with total
revenues of $1.748 billion in 1992. Los Angeles and Orange Counties follow
closely with revenues of $1.544 billion. New England is a distant third, at
$0.900 billion. These three U.S. regions account for over two-thirds of
industry revenues. San Diego is also a major U.S. biotechnology region with
revenues of $223 million in 1992. California's portion of the nation's
biotechnology employment dropped during the recessions of 1974-75, 1981-82,
and 1990-94.
82

Each California region has a distinctive market concentration. The
Oakland-Alameda area (East Bay) has the highest concentration of therapeutics
firms (for example one firm produces a clot dissolver to help heart attack
victims). Los Angeles, San Diego and San Francisco area firms tend to emphasize
diagnostics (monitoring blood chemistry), while Santa Clara Valley firms
specialize in biotechnology supplies. Firms in Sacramento and rural Southern
California generally specialize in agricultural technology (agritech).
83

Biotechnology industry growth can have a positive effect on non-manufacturing
industries. 84 For example, in
the five-year period 1987 to 1991,

[67 biotech companies] spent a total of $1.34 billion on
construction, renovation, and expansion of facilities, not including
expenditures paid for by landlord buildout allowances . . . . Survey
respondents cumulatively spent $164 million for rental or real property . . . .
The bioscience industry today utilizes more than 10.7 million square feet of
real estate in Northern California. Of the space usage reported in the survey,
44% is for laboratories, 32% for offices, and 24% for manufacturing.
85

This level of construction expenditures, accounting for 8 to 10 percent of the
value of all commercial construction and industrial building permits in the Bay
Area during that period, reflects the industry's youth and vigorous
expansion.

Much of San Diego's bioindustry development has occurred near the University
of California, San Diego, in La Jolla. The City of San Diego has created a
Scientific Research Zone near the university to encourage a synergetic
relationship with bioindustry. The research zone offers new land for
development, and in some cases new roads and other infrastructure. 86

A "critical mass" of biotechnology companies and proximity to major research
universities are important for start-up firms and for the development of a
regional bioindustry industrial cluster. 87 Regional clustering encourages and
facilitates constructive linkages between bioindustry firms. A regional
industrial cluster is defined as all of the "competing, complementary, and
interdependent industries within a region that are related to each other
through buyer-supplier linkages and shared economic foundations, such as a
skilled workforce or common technology base." 88 An industrial cluster allows for joint
venturing, sharing of expertise, a larger skilled labor pool, and better access
to technical knowledge. Linkages also extend to universities, venture
capitalists, and firms in other states and nations. 89 The ability to form both formal and
informal networks between large and small businesses--particularly
international ones--is
crucial for bioindustry cluster success. 90

In contrast, there is only a weak link between the development of
bioindustry firms and other high-tech firms in the same region. The
biotechnology industry generally appears to thrive on a special set of factors
not necessarily required by other high technology industries. One reason may be
the relationship between location and a strong single-market orientation
(diagnostics and therapeutics), such as medical biotechnology firms in San
Francisco and San Diego that have large populations or agriculture in
Sacramento. 91This finding
suggests that biotechnology may emerge in parts of the state that do not have
existing high technology industries but that do have factors important to
biotechnology, such as related university research and a trained technical
workforce.

Start-up biotech companies are focused almost entirely on research and
development, and consider traditional economic development location incentives
(such as cost of space, local regulations, wage rates, or taxes) as only
marginal inducements: 92

. . . the kinds of specific tax break, grants, and subsidy
carrots dangled by economic development authorities in front of biotechnology
companies do not play a large role in those companies' decisions to establish
facilities in one place rather than another. 93

Biotechnology companies tend to locate their R&D laboratories close to
corporate headquarters or in a region that has a high number of research
universities. 94 The
availability of well trained scientists, a nearby research university, and
various quality of life considerations are important, as is a strong local
education system which provides well trained technicians. The last point is
particularly important since it is costly to import large numbers of trained
workers, a problem that European biotechnology companies are currently
facing.

Availability of bank financing and venture capital is also important to
startups. 95 Once a region
develops a core set of companies and suppliers that are working closely
together, additional growth is more likely. 96 Since most biotechnology companies are
relatively new and small, they tend to be more vulnerable to economic slowdowns
than larger, more established firms. Lacking proven products, they find it
difficult to obtain funding to continue.

Table 5 identifies factors that are important to biotechnology manufacturing
firms in deciding where to locate. "Net percentage" in each box refers to the
percentage of firms which find a region to be advantageous, minus the
percentage which find it to be disadvantageous for that factor. For example, a
strongly positive score (e.g. East Bay ranking of 80 percent for "available raw
materials") means that the vast majority of firms consider the factor be very
positive in the region. On the other hand, a high negative score (for example,
the Los Angeles ranking of -91% for "cost of industrial space") means that the
majority of firms consider that particular characteristic to be disadvantageous
for locating biotechnology manufacturing in that region. The closer the
percentage is to zero the more disagreement among firms. The data in Table 5
indicate that the strongest location factor in all regions is closeness to
research and development laboratories. This finding is good news for
California, which has many such laboratories.

Since regional biotech industries tend to locate in specialized clusters,
their distinct requirements affect the location factors that each company
considers desirable. For example, bioindustry firms in the San Francisco East
Bay region are primarily suppliers, and thus find the availability of raw
materials and closeness to markets to be highly attractive. In contrast,
neither of these factors are important for Santa Clara firms who are research
oriented.

Unlike start-up companies, more mature companies entering the manufacturing
stage consider taxes, the cost of land, and other costs to be important.
Selecting a site for bioindustry manufacturing is a long-term issue, given the
high cost of building a bioindustry manufacturing plant and relocation costs.
97 Genentech's decision to place
a manufacturing plant in Vacaville illustrates how all of these factors come
together. The new plant will be located relatively close to corporate research
headquarters in the San Francisco Bay Area and to University of California
Davis, a major biological research institution that educates many skilled
workers:

. . . the firm was swayed by a state investment tax credit worth
up to $6 million and a research and development tax credit. . . . Genentech is
also benefiting from a pending $3.2 million federal economic development
grant, a $10 million state grant to retrain workers, a $4 million property tax
rebate by the city and Solano County, and a waiver of $1.8 million in permit
fees and sewer costs. Pacific Gas and Electric also cut the company's energy
rates. . . . [T] he low cost and high quality of living in the city . . .,
[and] the area's safety from earthquakes [all played a role] . 98

Puerto Rico is another example of the location value of business tax credits.
The federal tax code grants significant tax credits for businesses which locate
in Puerto Rico, a concession that has helped to attract more than forty
pharmaceutical and related firms. (The tax credit will be reduced to 40 percent
in 1998.) A trained local Puerto Rican workforce also helped attract
bioindustry manufacturing companies. 99

Although the discussion above has focused on biotechnology and bioindustry in
California and the United States, biotechnology is an international industry.
The U.S. remains the world center for research in pharmaceuticals, and the
world's largest market, accounting for 67 percent of world sales. The top five
countries for U.S. export are Japan, Germany, Italy, and France. U.S. producers
dominate about 40 percent of the U.K. and European drug markets. Much of the
success of U.S. producers results from local research and development and
manufacturing operations. The top five countries that sell biotechnology
products in the U.S. are the United Kingdom, Germany, Switzerland, Japan, and
Ireland. The U.S. pharmaceutical industry has consistently maintained a
positive trade balance in international markets over the past few years
(exceeding $1.3 billion in 1992).

Many California bioindustry firms are not knowledgeable about nor do they have
direct access to international marketing and distribution systems. Joint
ventures and other methods of joining with large multinational pharmaceutical
corporations are common strategies in California and around the world for
dealing with these shortcomings.

Competition for global markets is intense. Various state and national policies
encourage companies to develop local manufacturing and/or research and
development as a way of controlling their own markets and keeping jobs at home.
Following are brief descriptions of policy approaches used by several selected
European and Asian countries to develop and attract bioindustry.

Nearly 100 Belgian companies have major activities in biotech research and/or production. Foreign investment is significant. Virtually every major chemical company in the world has a plant in Belgium.

Local governments provide incentives to attract bioindustry. Financial incentives for research and development include easy access to capital and loans such as subsidies, interest free advances and interest rebates, and government guarantees. Tax incentives are targeted to attract distribution and coordination centers. Regional governments provide between 12 percent and 21 percent of investment funding in biotechnology companies.

All seven major Belgian universities have research departments specializing in biotechnology. Technology transfer between universities and industry by networking is encouraged. Universities have established programs to encourage joint ventures and to identify opportunities for technology transfer.

A $70 million program, "Biotechnology 2000," has been initiated by the German government to fund small biotech firms. The program provides equal matching funds for capital (including venture capital) raised by companies. However, the German "Gene Technology Law" and lengthy local permitting processes have driven firms to transfer large parts of their genetic research and production projects to the United States and Japan. 101

Flexible regulations have been developed in some areas to make it easier to downgrade the risk classifications of various organisms, relax professional requirements for genetic engineering work, and clarify some rules on the handling of bioindustry waste. 102

Germany has established the Institute of Molecular Biotechnology. Interdisciplinary teams are being formed to research the application of nanotechnology to manipulate "biomolecules" to manufacture new products at the molecular level. 103

Biotechnology is an economic development priority coordinated by a National
Committee for the Development of Biotechnology. Emphasis is on developing
pilot plants for the production of different food stuffs, and on fermentation.
New government initiated research centers are expected to be self-supporting
within five years. (The U.S. and other developed countries are providing almost
all the equipment for this effort.)

Recently passed legislation drastically reduces the amount of time required
for researchers to obtain a permit to conduct genetic manipulation experiments.
The new law requires a "best-informed-guess" risk assessment. Researchers are
able to proceed with their research two months after informing the relevant
authority, unless receiving notice to stop.

The government of Singapore is making worldwide investments ranging from
$300,000 to $1.2 million in small, promising companies that have the potential
for entering into collaboration with domestic and foreign companies. By May
1993, Singapore had $10 million invested in 14 bioindustry companies (three are
in the U.S).

The United Kingdom currently has the largest biotechnology industry in Europe. 108

The British government promotes strategic commercial alliances with North American companies as a priority objective. Nine of the top fifteen UK pharmaceutical companies have U.S. parents. This may result from what companies consider to be the United Kingdom's favorable manufacturing and corporate taxes. 109 Partnering between smaller U.K. research efforts and large pharmaceutical firms is encouraged.

Regulatory review of new pharmaceuticals is not as strict as the U.S. Federal Drug Administration and takes 120 days to complete.

A uniform pharmaceutical pricing system established by the National Health Services provides stable and predictable prices.

New initiatives include facilitating technology transfer agreements between industry and universities and helping to arrange funding for such transfers, easing of stock market restrictions, and making venture capital available. 110

The European Union has instituted new regulations so that products approved by individual member counties are deemed approved for the entire region within 120 days. 111